Semtech Q3: Beats Earnings, Acquires SMI

| About: Semtech Corporation (SMTC)
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Semtech Corp’s (NASDAQ:SMTC) third quarter earnings beat consensus estimates by 6 cents. This follows better-than-expected results reported by the entire peer group, including Maxim Integrated Products (NASDAQ:MXIM), Intersil Corporation (NASDAQ:ISIL) and Linear Technology (NASDAQ:LLTC).


Revenue of $75.1 million was up 13.3% sequentially and down 5.7% year over year. The sequential strength was broad-based across all end-markets except industrial and was derived from sequential increases across all product lines except power discrete. The decline from the year-ago period was recession-related.

Asia remained the largest region, with a 61% revenue share. North America was next, representing 23% of total revenue and Europe third, generating the remaining 16%. All three regions witnessed higher demand, with Asia growing 15.2% sequentially, North America growing 4.2% and Europe 20.9%. Both distribution and OEM sales grew in the last quarter, and distributor inventories declined.

Revenue by End Market

All except the industrial end-market saw double-digit sequential growth. The 21.8% and 20.9% increases in the high-end consumer and computing markets, respectively were on account of positive seasonality. The 19.0% sequential increase in communications was driven by strength in infrastructure spending.

The 9.3% sequential decline in industrial was due to weak demand for power discrete products within the military and aerospace segments of the North America region. The advanced communication and sensing product line witnessed the strongest growth, with revenue increasing 27.0% due to momentum at communications infrastructure OEMs.

The power management business grew 20.0%, helped by a more diverse product line and particular strength in high-end consumer and computing applications. Revenue from protection products was up 16.0%, again driven by consumer, communications infrastructure and computing markets. The 31.0% decline in the power discrete business was below management’s expectations, although order rates showed some improvement.

The protection, power management, advanced communication and sensing, and power discrete product lines generated 53%, 24%, 14% and 9% of third quarter revenue, respectively.


Orders were up strongly in the last quarter and we estimate the book to bill at 1.03. Turns sales increased both sequentially and year over year. We estimate that the backlog increased mid single-digits. Lead times remained short, in the 2-6 week range. Historically, management has always met guided revenue numbers, and in the last quarter revenue exceeded the high end of the guided range. Given the order momentum and backlog growth, we expect the company to meet or exceed guidance in the Jan quarter as well.

Operating Results

The pro forma gross margin for the quarter was 55.4%, up 40 basis points (bps) from the previous quarter’s 55.0%. The gross margin benefited from higher volumes and better product mix. Operating expenses of $24.0 million were higher than the previous quarter’s $2.2 million. The operating margin was 23.4%, up 192 bps from 21.5% recorded in the previous quarter.

The improvement was because of lower SG&A expenses as a percentage of sales, as well as flattish COGS and offset by higher R&D as a percentage of sales. New product development expenses had a significant impact on R&D in the last quarter.

Excluding the impact of restructuring charges, acquisition-related costs, stock compensation expenses and option and restatement related legal expenses on a tax-adjusted basis as well as one-time tax items, the pro forma net income was $16.4 million or 21.9% net margin, compared to $11.8 million or 17.8% in the previous quarter and $16.3 million or 20.5% in the year-ago quarter. Including the special items (-$0.61 per share), the GAAP EPS was -$0.34 compared to $0.12 in the Jul 2009 quarter and $0.19 in the Oct quarter of last year.

Balance Sheet

Inventories were down 4.6%, raising inventory turns from 4.5x to 5.3x. Days sales outstanding (DSOs) decreased from 35 to around 31. The company ended with cash and short term investments of $4.40 per share. Capital additions were $3.8 million in the quarter, netting a free cash flow of $19.5 million.


The fourth quarter guidance is for sequential revenue increase of 0-4%, with the GAAP gross margin increasing by up to 40 bps, GAAP R&D of $11.2 million, GAAP SG&A of $ 20 million, interest and other income of $300K, a GAAP tax rate of 14% and a weighted average diluted share count of around 62.2 million. Capital additions are expected to be $10-15 million and depreciation of around $4 million.

Sierra Monolithic Inc. Acquisition

Management announced that the company would be acquiring SMI for $180 million in cash, pick up $8 million of existing unvested stock options standing to the credit of SMI employees and pay out another $12 million in incentives to SMI employees. Transaction costs are currently estimated at around $2.5 million. SMI is expected to generate $15 million in revenue in 2009, which is expected to grow 20-30% in 2010.

The gross margin is expected to be 55-60% (slightly higher than Semtech’s current gross margin). Management also expects the business to require an additional $6-7 million in operating expenses and attract a non-GAAP tax rate of 22-25%. Management expects the business to be accretive to GAAP earnings within the next twelve months.